Sunday, June 01, 2008

Why are Oil Prices So High?

Why are oil prices so high? This is the question being asked with increasing frequency in many countries around the world. Some would have you believe that the blame should be placed on "greedy oil companies", "Arabs", "speculators" or "OPEC".

While speculation is happening with investors and hedge funds looking to commodities for returns that are not being seen in the stock or property markets, there are underlying fundamental reasons which mean prices are likely to stay high.

Last November the International Energy Agency released its annual World Energy Outlook report. Traditionally the agency has projected energy supply based on projected demand.

The agency has projected that India and China will lead the increase in energy demand making 45% of total growth. Oil imports for these two countries combined will grow to 19.1m barrels a day by 2030 compared to 5.4m barrels a day in 2006.

Demand for oil will grow to 116m barrels a day by 2030, an increase of 37% on 2006 oil usage. In this report back in November the International Energy Agency warned the price of a barrel of oil could rise to $159 by 2030 due to high growth in demand. This estimate now looks very conservative.

The reality is there have been some fundamental changes.

Before if the United States went into recession, this would lower demand for oil and prices fell. Now with China, India and other rapidly developing nations demanding ever increasing quantities of oil a recession in America is unlikely to lead to falling oil prices like it did in the past. Were per capita oil use in China and India to reach the same level as in the United States, this would fully deplete the world's remaining proven oil reserves in just 15 years and prospective resources, in 26 years.

The other fundamental change is that there is little excess production capacity. While Saudi Arabia would like the world to think it could increase production if it deemed it "beneficial" to the stability of the market, this is just an illusion of control. The reality of the OPEC cartel is that while sticking to production quotas may have benefited the group as a whole, individual countries have always "cheated" consistently and repeatedly exceeded their production quotas. In the past this has lead to significant downward pressure on prices.

This time the signs are that the world is at or near its maximum oil production capacity. Does this mean Peak Oil has arrived? In my opinion - not yet.

New production will continue to come online in the coming years which is likely to raise worldwide maximum oil production. So we haven't reached peak production... yet.

What we may be experiencing is what Robert Rapier calls Peak Oil Lite, with the early effects of Peak Oil arriving. Demand is rising faster than supply. In its July 2007 report the International Energy Agency predicts OPEC spare capacity will decline to minimal levels by 2012. The lack of spare capacity means, that price volatility increases with price spikes occurring in the event of supply disruption.

So what we are likely to experience prior to Peak Oil is Peak Export. According to Eugene Linden in BusinessWeek when it comes to oil our biggest concern should be the amount of "global oil available for export".

According to the Export Land Model developed by Jeffrey Brown - exports decline faster than production declines, the rate at which exports decline accelerates over time and only a small percentage of a producing country's production is exported following peak production.

According to a report in last week's Wall Street Journal, fresh information from the US Department of Energy shows the quantity of petroleum products shipped by the top exporting countries in 2007 fell 2.5% last, while prices increased 57%.

Net exports from major producers Mexico, Norway and Venezuela have fallen in every year since 2005.

With the rise in prices individual producing countries in OPEC had every incentive to "cheat" and yet exports fell. The influx of wealth into the Middle East has led to a boom in domestic demand. It seems that Middle Easterners aspire to the same gas guzzlers and energy rich lifestyles as Americans. Soaring profits from high-price crude have fuelled a boom in oil demand in Saudi Arabia and across the Middle East, leaving less oil for export. In 2007 the output of the region's six largest oil exporters - Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar - fell by 544,000 barrels a day. During the same period domestic demand increased by 318,000 barrels a day, leading to a decrease in net exports of 862,000 barrels a day.

A recent report from CIBC World Markets also indicates that as much as 40% of Saudi Arabia's expected production increases will be offset by rising internal demand by 2010, and Iranian exports will decline by more than 50% for similar reasons.

Indonesia recently withdrew from OPEC as it has gone from being a net exporter of oil, to a net importer of oil.

The Wall Street Journal report comments that the fall in oil exports "defies traditional market logic." Perhaps that should be blind faith that OPEC nations can turn on the taps if prices rise "too high". It seems even oil traders are unsure what is driving prices as according to one market analyst quoted by BBC News "we really don't know what the fundamentals are doing at any point in time." Much of the information on fundamental factors in the oil market is not public or freely available.

In simple terms demand is outstripping supply and prices are rising. This is how the market is supposed to work.

Other fossil fuel prices tend to follow oil. IEA's latest World Energy Outlook forecasts coal is set to rocket in demand, increasing by 73% from 2005 to 2030. This means coal's share in global energy demand will rise from 3% to 28%. It is predicted by 2015 America will go from being a net coal exporter to a net coal importer. Coal is the most carbon intensive way of generating electricity and this report predicts that rather than becoming a smaller part of the energy mix, coal is predicted to play a much bigger role.

With a presidential election this year in the United States and gas prices at record levels, oil and energy in general is set to be a key issue. There is the opportunity to have a serious debate about energy - a fundamental part of our lives which has been taken for granted for far too long. However the responses from the presidential candidates so far have not been encouraging.

In 2002 McCain declared that ethanol is a "giveaway to special interests in corn-growing states as the expense of the rest of the country." In 2003 he put out a press release saying "Ethanol does nothing to reduce fuel consumption, nothing to increase our energy independence, nothing to improve air quality." He went on to describe it as "highway robbery." Hillary Clinton signed a letter saying that there is "no sound public policy reason for mandating the use of ethanol".

McCain, Clinton and Obama all seem to have drunk the ethanol Kool Aid and seen the bright white light that has converted them to E85. In 2008 none of these presidential candidates seems to have anything negative to say about ethanol.

In 2006 Barack Obama along with four Republican and one Democrat senator introduced the Coal-To-Liquid Fuel Promotion Act.

There have also been accusations made against "Big Oil", "OPEC" (including by British Prime Minister Gordon Brown) and suggestions that a "gas tax holiday" or "windfall tax" would fix everything. It's always easier to find a scapegoat.

One bandaid being suggested from some quarters, is to open up drilling in the United States in areas which are currently off limit. This would give access to 19 billion barrels of oil enough to meet US needs for approximately two-and-a-half-years or world demand for just over 7 months at current rates of consumption.

To quote the head of the International Energy Agency:"All countries must take vigorous, immediate and collective action to curb runaway energy demand.

The next ten years will be crucial for all countries... We need to act now to bring about a radical shift in investment in favor of cleaner, more efficient and more secure energy technologies."

21 Comments:

At times I wonder that why prices (oil) rise so steeply in just a matter of few months (or may be days). After all the highly associated reasons like growing demand from China & India does not occur in one single short time period; rather it is a phenomena being felt over the last 3-4 years; from the time the now so "famous" BRIC report was released. Then why are we witnessing a sudden jump in prices now?

On the surface the high pricing of fuel has become a thorn that has poked everyone in the world, whether they drive or not (seeing that the cost of fuel touches everything these days), but lately the locked away hippie inside me is secretly excited every time the cost goes up. The high cost is causing pain for many people, which creates a market need that will theoretically drive innovation in the energy sector. At the rate the world is consuming oil it will be gone soon anyways, so we might as well figure out what is next before it runs out, and unfortunately the only way this is going to happen is if there is some big profits to be made (and there is). Here's hoping the next oil is less damaging to our environment.

Two words: Peak Oil! Whether it is this or more sinister reasons at work, the price of oil is not coming down anytime soon, lets all of us concentrate on sustainable and renewable forms of energy which will be good for us as well as the earth.

The Myth of Peak Oil. You all should really delve into academic, peer-reviewed works to educated yourselves. Peak oil is a scam designed to create artificial scarcity and jack up prices while giving the state an excuse to invade our lives and order us to sacrifice our hard-earned living standards. There is enough crude oil in the world for at least 200 years.

Peak oil is a model describing peak production of a non-renewable resource. Unless of course you believe that oil is a renewable resource, in which case I would like to see your evidence sourced from academic peer reviewed works.

I'd also like to see your evidence that a state (any state) is using peak oil to reduce living standards. I'm not aware of any state that officially recognises that peak oil may have already occured or may occur in the coming years.

Your final assertion that there is enough crude oil for the next 200 years while unreferenced presumably relies on petroleum reserves. However you don't take into account the rate of production, increasing levels of consumption and as my post above points out the importance of the amount of oil available for export.

For someone claiming to rely on "academic peer reviewed works" you fail to quote a single verifiable statistic or reference.

Here is my revised comment on alternative fuel. Since the energy we consume can’t be stored any nut can see we are doomed. Nevertheless, there is no infinite supply of energy- least of all being fossil fuel. Even suns burn out, explode and are recycled to form more suns, more planets. Do humans have preeminence? Well, lets see. If we convert totally to nuclear power, there is only so much uranium in the ground. Sun power will only work during daylight. Other methods being explored are contingent upon a limited amount of materials beings produced from the soil.

The very best we can do is conserve and hope like hell perpetual, alternate energy sources will be invented and or found or brought down to us from the Gods. There is no help coming out of Washington, no a high court decision, no Manhattan-style Project to solve this one. Prices for corn, chicken, pork and soybeans are predicted to double within a year. This will happen because we choose to feed grain to our insatiable hunger for the combustion engine-that stupid, so-called sexy, automobile.

President Jimmy Carter in his infinite wisdom, warned us about our lavish, wasteful way with fuel and it cost him his day job. Well, conservation will only prolong the inevitable. We are drinking up all the wine and there are simple no way to grow more grapes. We will run out! I personally believe no one wants to look realistically (some may say fatalistically) at our consumption habits and our inability to find perpetual energy sources. Here is a realistic thought. There may be none available! In our present state we may lack the ability to develop sustainable energy sources. Yet, we are fighting over which methods are best (solar, nuclear or bio) when all, so far, are doomed to failure. And as long as we continue to feed the automobile and waste precious resources, we expedite our own demise.

Remember the good old days before 1973 when gasoline was cheap? We could drive around town in our air polluting V8, run low on fuel, simple drive up to the pump and yell, “filler up”. Then alone came Yom Kippur. You remember them- Sadat, Meir, The Sinai, The Golan and the OPEC oil embargo against the US and other western nations. We thought the shortage of oil was them-dammed Arabs holding out on us. Well, the oil embargo is 30 years behind us. Why has oil gone form a simple shortage in 1973 at $12.00 a barrel to $25.00 a barrel in 2003 trading at over $100.00 a barrel in 2008 and headed toward $200.00 a barrel in just 5 years. The answer is we have nearly exhausted the only developed energy resource. And now our existing president, in finite wisdom (Mr. Bush) wants to ripe out the wilderness of Alaska or drill anywhere in order to exploit more of that Texas tea. Because he, unlike the dinosaurs, know the end is near. And its profit now or never.

If present trends continue- and they most likely will- the last few billion barrels of oil will not be traded on the open market; but will become the property of a military victor. And when the human species are gone it will be to a large degree our own arrogant, ignorant, self-centered doing- the complete mismanagement of our meager resources. And the combustion engine and our love affair with the horseless carriage will go down as human’s biggest blunder. Good luck to you all and you have my deepest sympathy.

I have a question - since crude oil from the ground comes from decayed plants and animals - cant we just pile up all the dead animals and trees and create an artificial crude oil. i mean if you notice when animals die - the "soup" they leave behind is black. There must be a way to create artificial crude oil from dead animals now.

Peak oil is far far away.Read about Gazprom's latest announcements and plans. Russia is on its path to become the next oil giant. Now we have not one superpower happy with high oil prices, but *two*. Best of luck, Planet Earth!Russia is more powerful and ruthless in its current form.

I agree with you that Russia is emerging as an energy superpower. Russia produced 9.8 million barrels per day in 2006 and according to the US Department of Energy is projected to produce 10.3 million barrels per day by 2015. However I don't see how that leads you to the conclusion that peak oil is "far far away". Also I'm unclear which other superpower you think is happy with high oil prices.

Anonymous,

Regarding making crude oil from dead animals. Liquid fuels can be made from a variety of sources including tar sands, oil shale, coal, biomatter etc. In terms of evaluating whether it should be done, one needs to consider if it can be done a)efficiently (EROEI) b)in economic quantities c)with acceptable environmental impacts

Alternative energy like solar and wind will not provide the US with the ability to significantly reduce energy costs for at least 40-50 years because the technology is not there. Unless the US; 1)Starts drilling for oil here and everywhere. 2) Starts immediately to convert to nuclear power plants. 3) Starts immediately to use coal wherever we can

and bust the Arab oil cartels then we will go bankrupt and will not have the money or time to perfect the solar or wind technology.

The above will take 12 -15 years if we start now. But, if we don't we will be in the same position 15 years from now as where we are today, which is exactly where we were 30 years ago. Just think: 12 Years ago when Clinton refused to drill for oil in Alaska he said it would take 10-12 years before we had any oil being pumped and was afraid to offend the environmental wacko groups and thus vetoed the drill bill. Today we could be using that oil. Best wishes, kcbus2@sbcglobal.net

Wind power is very close now to cost parity with fossil fuels (which continue to rise in price and supplies become tighter), so how can you see 50 years into the future?

To answer your other points:

1) Drilling for oil in the US will not lower prices as the oil will be sold at the international price, unless of course you want to subsidise oil or nationalise the industry.

2) If you're talking about lowering costs I'm very surprised your mentioning nuclear. Nuclear has a long history of very significant cost overuns and the industry is unable to cover their own liabilities and expects the government to do it for them.

3) The price of coal is closely linked to other fossil fuels. Coal prices have doubled in less than a year - there is massive demand from China. The U.S. already gets 50% of its electricity from coal. Again any coal produced will be sold at a price dictated by the international market.

As for the "Arab oil cartels", of OPEC's membership only half are arab countries. As noted above none of the measures you mentioned will significantly impact price and therefore have no chance of busting OPEC. The only way to bust OPEC is to dramatically decrease demand for oil - by say converting the vehicle fleet to run on electricity.

As to your final point about ANWR. If you are overweight it's important to eat less. Arguing over whether it's better that the food comes from abroad or domestically is irrelevant. If you drilled ANWR it would soon be depleted, just as the North Sea has peaked and is in decline now.

Could it be that prices have risen so fast in the last two years is based on the Democrats control of the house and senate. This firmly prevents any development of resources in the country that has more energy in than the rest of the world combined.Could it be that blocking oil drilling in Alaska, offshore, shale oil and coal development being blocked and pleading for the rest of the world to supply more of their resources has given rise to high energy prices. After all if we refuse to use our own resources than others will rightfully charge us more as supplies become scarcer because of our energy arrogance and false dependency on non-existant alternatives. Pretending that it is due to not adopting alternatives that are not practical even with these hugely inflated energy prices is just plain unrealistic and misses the cause of the problem and the solutions altogether.

James,Oil prices are high and the US dollar is low because we have been blocked for 30 years from developing our domestic resources. This during the past two decades has been by the Democrats.ANWAR would add 25% to out domestic supplies. Using deceptive statements saying this is a minor resource by comparing it to our entire usage and assunimg it would be a sole source of energy are disengenousBetween ANWAR, offshore and shale oil there is enough oil to supply 100% of our needs for a hundred years. As far as wind and solar I have never seen anything to contest the published estimates of about 10 cents per kwh unless carbon tax costs are figured in. They are 75% ineffecient which is documented in every installation, so they need back-up 75% of the time and do not clean the air. We have the opportuinity to replace wind with nuclear which costs less than 20% per kwh and has zero emissions and is 90% efficient. I am in favor of plug-in electrics which are possible today. Pure electrics do not have the range today and we cannot wait twenty years for the technology to mature. Are you trying to contest the fact that wind and solar cost many times that of any other type of power. That would be a very difficult position to defend and simply doesn't agree with the facts. Suppose you give me some actual results. It is very common to have these projects give wonderful projections of their performance. the results are always disappointing. There is no wind or solar project that would survive without massive subsidies and tax support. To say otherwise is deceitful.

I think you'll find the weakness of the US dollar has something to do with your huge deficit. I'm not aware of any oil industry experts (as opposed to political commentators) who actually believe ANWR will have a major impact on oil prices.

Quote:"As far as wind and solar I have never seen anything to contest the published estimates of about 10 cents per kwh unless carbon tax costs are figured in."

You obviously haven't looked very hard. Search for "wind power kwh".

Quote:"It is very common to have these projects give wonderful projections of their performance."This applies to Oil Shale. Care to back up your assertion that oil shale will provide diesel (not gasoline) for hundreds of years.

JamesAlternative Energy Blog

p.s. I suppose the federal highways were built without any subsidies, right? And let's not forget the nuclear industry.

The deficit pales in comparison to the one and one half trillion sent out of the country for oli. the entire US budget is three trillion. You continue to denegrate ANWAR, waht objection do you have to drilling in an airport size area in a 2.5 million acre reserve that would supply 25% of our domestic supply? Why woud you object except to support wind? Tar sands and shale oil supply 45% of Canada's energy and they currently sell oil to the US. Their dollar which has always been worth less than the dollar is now higher in value. this is reality. we have three times the oil reserves in shale oil as Saudi Arabia and you want to put up roadblocks so that we can build more wind farms which cannot meet our neeeds, are wildly inefficient, cost five times more and do not clean the air. Why should we continue to support this old-failed technology? What could be more archaic than dependending on wind for power?My proof of shale oil supplies? "Strategic Significanceof America’s Oil Shale ResourceVolume IAssessment ofStrategic IssuesMarch 2004Final ReportPrepared for:Office of Deputy Assistant Secretary for Petroleum ReservesOffice of Naval Petroleum and Oil Shale ReservesU.S. Department of Energy, Washington, D.C.Work Performed Under: Contract DE-AC01-03FE67758Task Order 6Prepared by:AOC Petroleum Support Services, LLC Washington, D.C.Principal Authors:Harry R. Johnson, INTEK, Inc.Peter M. Crawford, INTEK, Inc.James W. Bunger, JWBA, Inc.

The vast extent of U.S. oil shale resources, amounting to more than 2 trillion barrels, has been known for a century. In 1912, The President, by Executive Order, established the Naval Petroleum and Oil Shale Reserves (NPOSR). This office has overseen the U.S. strategic interests in oil shale since that time. The huge resource base has stimulated several prior commercial attempts to produce oil from oil shale, but these attempts have failed primarily because of the historicallymodest cost of petroleum with which it competed. With the expected future decline in petroleum production historic market forces are poised to change and this change will improve the economic viability of oil shale.

Figure 3. Unconventional Oil Resources Exceed World Conventional Resources (Ref. 9)0In terms of resource base, richness, accessibility, and expected production efficiency, U.S. oil shale has many of the same characteristics as Alberta tar sand. (See Volume II). Oil shale, coupled with Alberta's rapidly evolving tar sand industry, has the potential to provide a secure, steady base for North America's energyneeds for at least 100 years."

We have not built a nuclear power plant in 30 years and we are the largest producer of nuclear power in the world. This is the least expensive source of power in the US and the 20% of power produced dwarfs the 20 year plus effort of wind and solar which provide far less than 1% at costs five times more and with massive subsidies. Wind is a perpetually infant technology that for 20 years has been making promises that have not and cannot be met. we need to stop kidding ourselves and get on to real solutions for real problems and stop believing in old failed technologies like wind.

The Automobile Industry is going to be in the same position as the Airline Industry in the next few months. Unless we get away from gas combustion vehicles, including Hybrids, the automobile industry (as we know it) will die.We need to make drastic moves. America needs to move to ELECTRIC. The vehicles are not as fast, not always as fun to drive, but the move will save Americans money (Billions) and help bring change to our automotive companies. Let's "Be Green"!!!!!!!!!!!! BG Automotive Group Ltd. has a car that will travel 80-100 miles per charge for $15,995. Finally a car that most Americans can afford. Did you know that 80% of all drivers, drive less than 50 miles per day? This new car will cost an equivalent of $0.20-0.25 cents/gallon (depending on electricity rates in your area). Why send $700 Billion per year to OPEC (now buying up U.S. companies) when we can use this money for our schools, health care, social security for all Americans, etc, etc, etc. We can make the difference if WE change.

Oil will continue to go high in price as the oil companies choose to do so. They are making a immense profit from the industry. I am seeing more companies invest in alternative energy as previously, such as shell. But the investment is so small, alternative energy wont be used by corporations until the next 10 years unless a new corporation with a lot of money takes over.

This is not a temporary issue. Oil prices will continue to surge with the demand of oil increasing world wide. Switching to alternative energy is the way to go but its expensive unless a solution is found which is efficient, cheap and accessible to common people.